Pushing the Boundaries of the Traditional Investment Model

Since the number of investable, publicly traded companies peaked at 7,439 in 1997, the U.S. stock market has seen over half of those companies drop their public offerings status. Similarly, the Wilshire 5000, aptly named for the total number of issues it contains, currently stands at just under 3,500 components. Many companies have shifted from raising capital through the public markets to utilizing the resources of private capital organizations and other private investors.

In the first article in this series, I outlined certain areas of concern for the traditional investment model, providing awareness that traditional stock market investments have seen their best days. Market movements, whether up or down, have become highly correlated, reducing the potential for truly stellar returns. The public market, once known to provide excellent opportunities for investment diversification, has become limited, and we must look at alternative investment opportunities for true diversification.

The age-old method for analyzing and actively managing traditional stock trading has become increasingly limited. Passive investing has more than doubled from 2007 to 2017, with passive investments representing nearly 45% of all equity assets in U.S. mutual funds and ETFs. Vanguard is predicting a three percent decrease in its expected rate of return over the next decade. So how does this look for other big players in the financial sector and what does it mean for the future of the stock market?

There are roughly six million companies in the U.S. — and as of 2017 data from the Bureau of Labor Statistics, only 5,343 are listed on public exchanges. That is less than one percent of the total opportunity set. Now imagine a circle that contains all six million companies, the public markets are a tiny dot within that circle. And that dot is very, very crowded.

Technology has become a staple in almost everything we do — how we shop, how we communicate, how we navigate, and so on — and it has become an essential part of the financial industry. “Fintech” has introduced us to robo-advisors and these guys can accurately manage your assets at a fraction of the cost of the traditional wealth management advisor. Advisors continue to fight for business though, offering lower fees, but they are still stuck working in the same small investment dot (along with the roboadvisors).

Having shared with you how I began exploring the alternative investment frontier, I stated that advisors who consistently sell their clients on narrow investment options are only selling themselves short on their own return on investment. Identifying new and innovative investment opportunities provides clients with a diversified portfolio necessary for realizing respectable returns. Identifying niche private investments will provide a way out and a way up for wealth management advisors.

It is time to grow your investments outside the dot (i.e. outside the public markets) and find investments that will work for you in the private sector. In 2017, a record $710 billion in private offerings were sold through brokers. That’s a threefold increase since 2009, according to a 2018 article published by the Wall Street Journal.

The current private investment model, however, is limited to accredited investors whose net worth exceeds $1 million, or who meet a certain income threshold. This rule is set to protect retail investors against potential fraud as the private market has typically been less regulated. It is worth noting that the SEC is evaluating policy changes that would increase the number of people allowed to invest in private companies. Opening access to the private markets could reshape the financial landscape, allowing retail investors to diversify their portfolios through the addition of startups and other alternative investments.

The alternative investment frontier is exploding with growth, with research estimating that it will grow to nearly $14 trillion globally by 2023. Investors are yearning for a strong yield and alternative assets demonstrate a robust track record.

In the final article of this series, I will share how I found my niche, what you should look for when identifying yours, and the endless opportunities that alternative investments offer when you take the leap outside the dot (i.e. outside the public markets).